Published: October 11, 2010

If the "nuclear renaissance" is not dead, it appeared in a coma for most of the country following the collapse of Constellation Energy's plan to build a third reactor on Maryland's Chesapeake Bay shore, energy officials said this weekend.

Constellation announced Saturday after news reports surfaced that it could not accept a $7.5 billion conditional federal loan guarantee because the Obama administration had insisted on too great a "down payment" in the form of a credit subsidy charge the developers would have to pay to the federal government to obtain the guarantee. The charge is an insurance premium intended to protect taxpayers against losses if the project could not be completed, or if its power costs were too high to compete and the owners defaulted on the loans.

In calling off negotiations, Constellation scrapped what would have been a test case for a new nuclear reactor in the competitive electricity markets that serve a majority of U.S. electricity customers. Only an intervention by Constellation's French partner EDF, the state-owned utility, seems able to revive it, a prospect that some experts said seemed unlikely.

The Energy Department has approved a conditional $8.3 billion loan guarantee for two reactors in Georgia. But Southern Co., the primary developer, is permitted to recapture costs during construction, and another project partner has a "hell or high water" sales contract requiring customers to keep paying down on the project's debt even if the reactors can't be completed. Companies in competitive markets can't pass on project risks that way.

The campaign for new nuclear projects has run into depressed electricity demand due to the recession and the prospect of competition from low-priced natural gas from shale deposits. Nuclear power's foes have also kept up an attack on the use of DOE loan guarantees for new reactors contending that the risks to taxpayers were too great unless the credit subsidy requirement was pushed far up.

Backed by an endorsement by President Obama, the Energy Department had hoped to use the guarantee program to support a few new reactors to test nuclear's potential as one of the answers to limiting greenhouse gas emissions. DOE kept seeking a solution in the Constellation case, sources close to the negotiations said, but a skeptical position from the Office of Management and Budget prevailed.

Constellation released its Oct. 8 letter to Deputy Energy Secretary Daniel Poneman yesterday, protesting a "shockingly high" figure for the credit subsidy of 11.6 percent of the guaranteed loan amount, or about $880 million, set at one point this summer. "Such a sum would clearly destroy the project's economics (or the economics of any nuclear project for that matter)," the company said.

Constellation: administration terms not 'workable'

In the letter, Michael J. Wallace, chairman of Constellation's nuclear group, complained that when Constellation officials tried to work around the issues, they were repeatedly rebuffed in even getting a hearing from OMB. Sources familiar with the negotiations said the administration agreed to lower the credit figure to around 5 percent. But Constellation would then have to add $300 million in additional equity and agree to purchase a majority of the electricity the plant, as the Washington Post reported. Constellation was looking for around 2 percent and it concluded that it "does not see a timely path to reaching a workable set of terms and conditions. ... While it may yet be that our partner EDF is able to proceed in the face of such uncertainty, Constellation Energy is unable to do so."

But that partnership appeared to be unraveling, too. The proposed Calvert Cliffs 3 reactor was conceived as a joint venture between Constellation and EDF, France's government-backed utility and nuclear fleet operator. EDF spent $4.5 billion two years ago to get 49.99 percent of Constellation's nuclear operation, after energy trading losses had plunged the Baltimore-based company into a financial crisis.

EDF's financial backing and the participation of France's reactor builder Areva, were crucial bulwarks for the Maryland project, with expectations that French export credits would help meet the financing requirements.

EDF began sparring with Areva this summer over the escalating costs of new Areva reactors in Finland and France. With the Calvert Cliff's project at a critical juncture this summer, Constellation signaled that it might compel EDF to purchase some coal-fired power plants, an option EDF's purchase agreement provided -- a provision EDF hadn't expected to have to meet, industry officials said. The option expires in December, another key timing factor.

Constellation's exercise of its option would be a "breaking point" that "will destroy the credibility of the management" at Constellation, EDF Chairman and CEO Henri Proglio said last month, according to a Baltimore Sun report.

EDF said Saturday it was "extremely disappointed and shocked to learn that Constellation has unilaterally decided to withdraw from the Calvert Cliffs 3 project." The company said it had been "at the finish line" in the loan guarantee process and that Constellation had withdrawn "in spite of our repeated efforts to substantially decrease their exposure and risk to the project."

An official of another energy company that had considered new reactor projects said, "We're going to build gas [generators] and that's the way it is. You just have to wait for the market to come back. That is the only logical thing to do."

The responsibility for the next move in 2011 may shift to Republicans in the House, if their numbers increase, this official said. The nuclear option has many GOP supporters, but their platform also includes attacks on the Obama administration's clean energy initiatives and the deficit, the latter stance allying them with nuclear power opponents on the left.

The overriding challenge, this official said, is to find a path of the national energy policy miasma and focus on where the nation's electric power will be coming from after 2020, before there's no time left to carry out the plans.